Abenomics' Legacy: Japan's Greatest "Misery" In 33 Years

Back in early 2013, in article after article, we warned that Abenomics would be an epic disaster. Actually we take that back: we said it would be an epic disaster for most of Japan's citizens. A select very few, just like in the US, would benefit greatly from the unprecedented asset reflation to follow the massive currency devaluation that the prime minister had just launched.

Over a year later, we find that we were yet again accurate in our forecast.

Meet Mieko Tatsunami, a 70 year old retired kimono dresser from Tokyo. Unlike the scores of paid actors ordered to pitch Abenomics and to spread the gospel of rising asset prices, Mieko shares a most rare commodity in this day of pervasive propaganda: the truth.

“The price of everything we eat on a daily basis is going up,” Tatsunami, 70, a retired kimono dresser, said while shopping in Tokyo’s Sugamo area. “I’m making do by halving the amount of meat I serve and adding more vegetables.”

Ironically, that's what Americans are doing too. Only here the "halving" of the food is done by the food producers, while the consumers rarely if ever notice that they are being jobbed, and are paying the same amount for ever lesser amounts of food. At least in Japan they are honest about food inflation.

As Bloomberg shows, Tatsunami’s concerns stem from the price of food soaring at the fastest pace in 23 years after April’s sales-tax increase. Rising prices helped push the nation’s misery index to the highest level since 1981, while wages adjusted for inflation fell the most in more than four years.

Ah yes, the title. We weren't kidding. As of this moment, Japan's misery has not been higher in an entire generation! Its Misery index that is, which combines unemployment (3.6%) and inflation (3.4%), and results in an unprecedented 7.0%: the highest in 33 years!

To be sure, we warned explicitly about Japan's soaring food prices. And now, here they are:

With food accounting for one quarter of the consumer price index and the central bank looking to drive inflation higher, a squeeze on household budgets threatens consumption as Abe weighs a further boost in the sales levy. The prime minister may be forced to ease the pain with economic stimulus, cash handouts or tax exemptions championed by his coalition partner.

“Price hikes without confidence that wages are going to rise will hurt appetite for spending,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “Abe has to raise people’s belief that the economy will improve.”

To be sure, it didn't take a rocket surgeon to figure out what would happen to food and energy prices in a country that is actively depreciating its currency and which is only 39% self-sufficient on a calorie basis and more reliant on inbound shipments of fossil fuels after the Fukushima disaster in 2011 - hence, would be forced to spend that much more (and pass through these costs) on food and energy imports.

Yet apparently not a single economist in the Abe cabinet couldn't comprehend what was sure to follow a 20% devaluation in the Yen.

The result is clear:

The cost of imported beef rose to 230 yen ($2.24) for 100 grams at stores in central Tokyo in April from 187 yen a year earlier, government data show. Growing vegetables in greenhouses is more expensive as a result of increased energy prices, according to Naoyuki Yoshino, the Tokyo-based dean of the Asian Development Bank Institute.

Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo, said food inflation likely accelerated in May and will remain high.

But it is not soaring food and energy prices that are crushing the Japanese economy under Abe more than under any of his predecessors: it is the collapsing wages. As we reported two days ago, base Japanese wages excluding bonuses (which are a benefit to just 20% or less of the workforce), have now declined for a near-record 23 months in a row. As Bloomberg, logically, adds, "the prime minister’s drive to fatten paychecks more than inflation is at risk of stalling, with wages excluding overtime and bonus payments falling for a 23rd straight month in April. "

So what are the "non-1%ers" like Tatsunami to do in this slimate of near record "misery"? According to the chief market strategist at Mizuho, Yasunari Ueno, an option for Abe would be to provide more cash handouts to help low-income households: something the US president has gotten the hang of quite well courtesy of his relentless debauching of the world's reserve currency (unknown for how much longer). Sadly, the Yen is nowhere near a reserve, and such a move would run counter to the government’s effort to reel in the world’s largest debt burden: considering Japan's debt/GDP is running around 240% these days, the last thing Japan can afford is even a faint hint of a debt crisis.

Which means no way out: with higher food prices, people will cut back on durables, luxury goods and eating out as they did after the sales tax was last increased in 1997. Japan then ended up in a recession. A recession in a time of Abenomics would crush the prime minister and promptly put an end to the BOJ's $70 billion per month liquidity injection, the proceeds of which mostly end up in the US stock market anyway.

And while the 1%ers will be fine in any situation, the elderly, many of whom are on fixed incomes, will be hit the hardest, said Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute in Tokyo. Kumano estimates households headed by people over age 60 accounted for nearly half the nation’s consumption last year. “If prices keep rising, there is a risk that consumption by seniors may be damped as they don’t enjoy the benefit of wage increases,” Kumano said cited by Bloomberg.

We close with Tatsunami: “Abenomics may be helping the big corporations, but life’s tough for people like me,” said Tatsunami, who has seen her pension shrink. “We don’t go out as much as we did -- we’re having to cut back."

Ironically, this is precisely what we said over a year ago. And now even the common Japanese man has grasped it. In fact, everyone else too. Everyone expect Abe and Kuroda.

Which brings us to the next steps: we have said it before, so we will give Bloomberg the honors:

The squeeze on households could damage support for Abe’s administration, whose approval rating fell to 53 percent in a Nikkei survey in May from 62 percent when he took power in December 2012.

That's right: just like Abe's reign ended in humiliation (and diarrhea) the first time around, so to his second attempt to fix the Japanese economy will be a disaster: it is just a matter of time before someone finally admits that yet another emperor is wearing no kimono. The only question is when.

And just like that Japan is about to learn that soaring stock prices always have a trade off, a lesson which even GETCO's S&P ramping algos will not be exempt from when the latest bout of soaring food inflation results in central banks scrambling to withdraw liquidity, just as they did in early 2011. The results will naturally be the same.

As for how long Abe's government will remain in power after energy and food inflation sweep through the net importing nation, that is anyone's guess.

We hope - for their sake - that Japan's ordinary citizens, not the 5-10% who benefit from the Nikkei's surge, but the 90% or so who couldn't care less what the stock market does but have no choice but to care very much about the price of food, make the right decision and get rid of their catastrophic government soon, before it is far too late.